The tax privileges of investing in pension plans generally make them a key focus in tax planning.

Pension funds are broadly free of UK tax on their capital gains and investment income. When you take the benefits, up to a quarter of the fund is normally tax free, but the pension income will be taxable.

Most people aged 55 (rising to 57 in 2028) and over can draw their pension savings flexibly. Withdrawals above the tax-free amount are liable to income tax at your marginal rate. You should take advice before accessing pension savings as there are several options and they will generally have a long-term effect on your financial position.

The annual allowance was left untouched in the Autumn Statement of 22 November 2023, but a future reduction in tax relief for pension contributions remains a possibility. You might want to maximise your pension contributions for 2023/24 by making further contributions before 5 April 2024.


There is an annual limit of £60,000 on pension contributions that qualify for tax relief, although this limit is tapered down to a minimum of £10,000 if your income exceeds £260,000. You can, however, carry forward unused annual allowances for up to three years to offset against a contribution of more than the annual limit. For people already drawing a flexible income from a pension, the annual allowance is also £10,000.

  • You can pay up to the whole of your earnings into a pension scheme, but the tax relief is capped by the annual allowance plus any unused allowances brought forward.
  • Tax relief on pension contributions is normally at least 20%, and higher or additional rate taxpayers receive relief at 40% or 45%. In Scotland, intermediate, higher and top rate taxpayers receive relief at 21%, 42% or 47% respectively. Limiting your contributions to amounts that qualify for at least 40% tax relief will give you the most benefit.
  • Effective relief can be as high as 60%, or 63% in Scotland, where the personal allowance is being withdrawn, and can be even higher if universal credit payments or tax credits are being withdrawn.
  • You could set up a pension for your partner or children since they don't need earnings to build up to £3,600 in a personal pension. Even if they do not pay any tax, they can still benefit from 20% tax relief.

Lifetime allowance

There is no longer any limit to the amount you can hold in a tax-favoured pension scheme without triggering an extra tax charge. However, all tax-free lump sums, including death benefits, are still tested against a lifetime limit set at £1,073,100.

Planning point

The combination of tax relief on contributions, tax-free growth within the fund and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive savings vehicle, the more so since the abolition of the lifetime allowance.

Useful link: Information about pensions and pensioner benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.